Its Life Jim

Its life Jim, but not as we know it’ – not actually a quote from Leonard ‘Bones’ McCoy from Star Trek, but a line from the 1987 song ‘Star Trekkin’ by The Firm. However, this phrase seems to aptly capture the unprecedented change in lifestyles for not only the UK, but also Europe, the US and the rest of the world.

Who could imagine that some three months after the general election and signs of a ‘Boris bounce’ that the PM would address the country and  warn of a ‘severe blow’ to the UK economy and ask all of us to not go to the pub or cinema, avoid non-essential travel and self -isolate?

Covid 19 started as a China specific challenge in the first quarter, but has escalated in a matter of weeks into a global war against the virus which is likely to tip the world into recession. The main question is how long and how deep is it likely to be? One US research broker has forecast a 25% contraction in the US economy in the second quarter!

While it feels pretty grim at the moment there are some rays of light. There have been no new domestic coronavirus cases in China in recent days, BMW has reported Chinese manufacturing plants getting back up and running some 4 weeks after shutdown. South Korea has also reported the lowest number of new coronavirus cases. Coronavirus can be beaten. Meanwhile, in the UK, some directors have started to buy shares.

Without further clarity, there will more than likely be more coronavirus disruption for us over the coming weeks – but we will come through this. Similarly, markets will also be disorderly until there is greater visibility as to when restrictions on economic activity, required to flatten the curve of covid-19 cases, will be curtailed. Everyone will be watching new case trends closely.

Please follow the government advice. Look after yourself and think of those in working in essential services and neighbours perhaps without family support.

What have we been watching?

Pictures of deserted streets in major cities around the world as more coronavirus containment measures come into force.

Yet another bruising week for global investors with the US market experiencing its biggest fall since Black Monday 1987. US indices have now given back the entirety of their gains during the Trump presidency. The trigger appeared to be President Trump who discussed the possibility of a recession and suggested that disruption could last until the summer.

Some companies are starting to remove forward looking earnings guidance as they cannot predict the impact of coronavirus. Some others which have suddenly seen a drop in sales due to coronavirus are having to suspend dividend payments to conserve cash. Meanwhile, a number of UK property funds have been suspended. The UK car industry is also grinding to a halt with Nissan, Vauxhall, BMW, Toyota and Honda all looking to temporarily shutdown factories due to coronavirus. The coronavirus containment upon the UK economy is reflected in the more domestically focused UK mid-cap which has fallen by over 43% in a month.

The number of new coronavirus cases globally continues to climb surpassing 300,000 although there are some encouraging signs in China with no new domestic cases, although it has reported 34 new cases among people who have recently returned to China. The initial global supply chain shock, which was the first domino in the coronavirus chain may start to correct as a number of companies have reported that many Chinese factories are getting back to 90% capacity. The problem may be whether the rest of the world will now need these goods or components if factories in the west are now closing due to coronavirus and consumers are forced to self-isolate. Nevertheless, BMW said that 95% of its dealerships in China are now open and manufacturing is getting back to full capacity, as is the supply chain. That is about 3-4 weeks after shut down and is a reminder that while things feel grim in the UK that this will come to an end.

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In the UK, the Chancellor unveiled unprecedented levels of support including the payment of salaries and loans to business. Other key measures were a three-month mortgage and payment holiday for borrowers facing difficulties and an extension of the business rates exemptions. Sterling slipped to $1.15 a 35-year low, although given none of us are allowed to currently fly to the US on holiday this may be the least of our worries.  The US Dollar is seen as a safe haven in times of financial stress but sentiment has not been helped by PM Boris Johnson’s comment that he would not ask for an extension to the Brexit transition period. The Bank of England also cut interest rates from 0.25% to 0.1% and is increasing its QE bond buying programme by £200bn which should provide a significant boost to the UK banking sector as it looks to support business and household cashflow challenges.

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In Europe, Christine Lagarde, President of the European Central Bank (ECB) was reported to have suggested that eurozone GDP could contract by 5%. Germany, France and Spain all announced government support packages while the ECB confirmed a €750bn emergency bond purchase programme taking the planned asset purchases this year to €1.1trillion, equivalent to 6% of eurozone GDP.

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In the US, the Treasury approved a $10bn ‘coronavirus credit facility’ to allow the Federal Reserve to directly purchase short-term corporate debt and reduce strains in the credit markets.  The main news however was a $1trillion support package proposed by President Trump equivalent to over 5% of US GDP. This would possibly involve ‘helicopter money’, that is sending cheques to American households copying a tactic undertaken in Hong Kong.

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In Japan, PM Shinzo Abe is reported to be considering reversing the country’s sales tax hike.

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A sign of what we might expect to see around the world from coronavirus containment measures? China reported that retail sales fell by 20% last month.

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Brent oil slumped by 10% in a day after Saudi Arabia said it would keep pumping oil and dropped to under $25 before recovering to $30 on central bank and government supportive measures.

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Finally, it may not feel like it but we will get through this… its always darkest before dawn.

Stay safe.

Read Last Week’s Alpha Bites – Two Black Swans

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.